Alerts and Updates

Russia Takes Steps to Implement Import Substitution Plan for Software

July 15, 2015

These steps are aimed at implementing the Russian government's strategy of preference for domestic IT products in federal government and municipal procurement programs.

On June 16, 2015, the Russian Duma—the lower house of the Russian parliament—approved Legislative Bill No. 764677 in a third (and likely final) reading, taking another step forward on an import substitution strategy for software used in Russia.[1] Earlier this year on April 1, 2015, the Ministry of Communications and Mass Media ("Minkomsviaz" or the Ministry) issued Order No. 96 "On the adoption of plan for import substitution of software" ("Order No. 96"). The Russian government also drafted and published a regulation on the public procurement of software for federal and municipal needs in February 2015 (the "draft Software Procurement Regulation").

These steps are aimed at implementing the Russian government's strategy of preference for domestic IT products in federal government and municipal procurement programs. The stated goal is to support Russia's domestic IT companies and, ultimately, to reduce the dominant position of foreign (primarily U.S.) software in Russia's domestic software market. Presently, according to some experts, imported software accounts for 95 percent of the market in virtually every category of corporate and office software.

Should U.S. software giants be concerned? Probably not now, but they may want to pay attention to Legislative Bill No. 764677 and other steps the Russian government is taking to effect import substitution, including Order 96 and the Software Procurement Regulation.

Minkomsviaz's Order No. 96 contains an addendum that divides all software products into three categories:

The plan introduced by Order No. 96 calls for reducing imported software for government use, by 2025, having a 50-percent share of software in Categories 2 and 3 developed domestically and having a dominant share of domestic software in Category 1 (for example, web-based corporate services to be about 90 percent).

Some experts seem skeptical about this initiative. However, the Ministry appears optimistic and cites Russia's history of producing competitive Russian IT solutions in the corporate software market segments. Although the Ministry does not provide specific names, it probably has in mind Kaspersky® antivirus programs that are successful worldwide, including in the United States, and the Yandex® search engine, which still dominates Russia’s market.

Legislative Bill No. 764677, approved in June, is titled as law "On Amending Federal Law on Information, Information Technologies and Protection of Information and Other Legislative Acts of the Russian Federation." Once approved by the Federation Council (the upper house of the Russian parliament) and signed by President Vladimir Putin, the bill will become law. The bill proposes that the law will come into effect on January 1, 2016.

If Bill No. 764677 becomes law, a registry of domestic software programs will be created. Inclusion of a software program in that registry will enable its owner to participate in Russian federal government and municipal procurement programs and receive preferential treatment in certain cases.

Under the bill, the criteria for inclusion of software in the registry are as follows:

ownership of the software belongs to a single or several Russian entities;

software is available for purchase on an open market;

the total amount of license fees or other royalties paid to foreign entities and domestic entities controlled from abroad is less than 30 percent of gross receipts received by the software owner from the annual sales of the software;

the software does not contain data that are considered a state (government) secret.

Under the government's draft Software Procurement Regulation, an organization that is soliciting contractors and products for government needs would have to limit bidders only to owners of software that is included in the registry. If it does not do so, it has to explain the reasons. It appears the absence of a capable domestic software product in a particular software segment in which the bidding is organized would be a satisfactory explanation. For many public procurement programs, developers and owners of software programs that are not in the registry but that include open source software may also receive preferential treatment.

Because the Russian government and municipal governments, as well as the financial and oil and gas sectors,[3] are the main purchasers of software (others often obtain software illegally or on the gray market), the import substitution for software measures may have an impact on U.S. and other software companies that sell their software in Russia. Interestingly, Russia's import substitution measures do not appear to provide any preference to software owners from China, India and other non-western countries—countries that were not subject to Russia’s food import ban[4]—but ultimately give preference to software owners in the countries of the Eurasian Economic Union.[5]

Notes

[2] Decision of the Government of the Russian Federation No. 758 of November 6, 2007, on the "Procedure of state accreditation of organizations carrying out activity in the field of information technologies."

[3] It is quite likely that the import substitution measures would also apply to some private procurement if an entity has a significant government stake. For example, these measures most likely would be extended to such giants as Sberbank (savings bank of Russia, the largest bank in Russia) and Rosneft, Russia's largest publicly traded oil company.

[4] Russia introduced the ban on most food imports from the United States, European Union and other countries on August 7, 2014, in response to Western sanctions on Russia over the Ukraine crisis.

[5] A treaty establishing the Eurasian Economic Union (EEU) was signed on May 29, 2014, by the leaders of Belarus, Kazakhstan and Russia, and came into force on January 1, 2015. Armenia and Kyrgyzstan also signed treaties, acceding to the EEU.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.

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